What To Expect From Union Pacific’s Q2?

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Union Pacific

Union Pacific (NYSE: UNP) is scheduled to report its Q2 2022 results on Thursday, July 21. We expect Union Pacific to post revenue and earnings slightly below the street expectations. While the company should benefit from strong consumer demand and a shift toward lower-cost transportation alternatives, the weakness in manufacturing output may weigh on its top-line growth. The manufacturing output fell 0.1% in May after a rise of 0.8% in April. [1]

Furthermore, rising costs due to higher inflation will likely result in a rise in the company’s operating ratio. That said, our forecast indicates that UNP stock is undervalued at its current levels, as discussed below. Our interactive dashboard analysis of Union Pacific Earnings Preview has additional details.

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(1) Revenues expected to be slightly below the consensus estimates

  • Trefis estimates Union Pacific’s Q2 2022 net revenues to be around $6.0 billion, reflecting a 9% y-o-y growth but marginally below the $6.1 billion consensus estimate.
  • The company should benefit from strong demand for coal, given rising natural gas prices. Henry Hub natural gas price has increased to $6.3 per million British thermal units (MMBtu) currently, compared to $3.7 toward the end of 2021.
  • U.S. coal production of 289 million short tons (MMst) in the first half of 2022 reflects a 2% rise from the prior-year period. [2]
  • Higher inflation has resulted in some shippers turning to low-cost alternatives, such as railroads. With rising costs, the company should be able to expand its average revenue per carload, boding well for its top-line growth.
  • However, due to the issue of the semiconductor chip shortage, automotive shipments may continue to face slower growth.
  • A lower manufacturing output in Q2 will likely weigh on the merchandise segment revenue growth. Our dashboard on Union Pacific Revenues has more details on the company’s segments.
  • Union Pacific reported a 17% rise in revenue to $5.9 billion in Q1 2022, led by a 4% growth in the total volume of carloads and a 12% rise in average revenue per carload.

(2) EPS likely to be marginally below the consensus estimates

  • Union Pacific’s Q2 2022 earnings per share (EPS) is expected to be $2.88 per Trefis analysis, slightly below the consensus estimate of $2.92.
  • The company’s net income of $1.6 billion in Q1 2022 reflected a 22% rise from its $1.3 billion figure in the prior-year quarter, driven by higher revenues and a 70 bps y-o-y drop in operating ratio to 59.4%.
  • With rising costs, and a tough comparison with the prior-year quarter, which saw a 590 bps y-o-y drop in operating ratio to 55.1%, we believe the operating ratio will trend higher in Q2 2022.
  • For the full-year 2022, we expect the adjusted EPS to be higher at $11.89 compared to EPS of $9.95 in 2021.

(3) UNP stock looks undervalued

  • We estimate Union Pacific’s Valuation to be around $270 per share, which reflects a 31% premium to the current market price of $206.
  • At its current levels, UNP stock is trading at just 17x forward earnings, compared to the last three-year average of 22x, making the stock attractive from a valuation point of view.
  • Furthermore, if the company reports upbeat Q2 results and provides an outlook better than the street estimates, the P/E multiple will likely be revised upward, resulting in higher levels for UNP stock.

While UNP stock looks undervalued, it is helpful to see how Union Pacific’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for CSX vs. Amerco.

With inflation rising and the Fed raising interest rates, among other factors, UNP stock has fallen 17% this year. Can it drop more? See how low Union Pacific stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Jul 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 UNP Return -4% -18% 98%
 S&P 500 Return 1% -20% 71%
 Trefis Multi-Strategy Portfolio 1% -23% 208%

[1] Month-to-date and year-to-date as of 7/15/2022
[2] Cumulative total returns since the end of 2016

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Notes:
  1. U.S. Industrial Production Eased in May, Adding to Signs of Economic Slowdown, Rina Torchinsky, June 17, 2022, The Wall Street Journal []
  2. Short Term Energy Outlook, EIA []